More than fifty years have passed since computers began to be used in business, yet there remains much we don't know about their influence on commerce in general and corporate performance in particular. At a broad level, we can't yet say precisely why computerization had little effect on industrial productivity for four decades and then, in the mid-1990s, suddenly seemed to become the driving force behind a sharp acceleration in U.S. productivity. Nor can we say with certainty why the recent productivity gains have been so unevenly distributed, appearing in certain industries and regions that have invested heavily in information technology but not in others that have also spent great sums on computer hardware and software.
When we look at individual companies, the picture becomes even murkier. Information technology has changed the way companies carry out many important activities, but it has not—at least yet—led to any alteration in the essential form or size of corporate organizations. It has delivered great benefits to a handful of firms, even propelling a few into positions of industry leadership, but for most businesses it has been a source more of frustration and disappointment than of glory. It has allowed many companies to substantially cut their labor costs and working capital, but it has also led managers to plow cash into risky and misguided initiatives, sometimes with catastrophic results.
Simply put, it remains difficult, if not impossible, to draw any broad conclusions about IT's effect on the competitiveness and profitability of individual businesses. Information technology has become the largest of all corporate capital expenditures—and an intrinsic element of nearly every modern business process—but companies continue to make IT investments in the dark, without a clear conceptual understanding of the ultimate strategic or financial impact. The goal of this book is to help promote such an understanding, to provide business and technology managers, as well as investors and policy makers, with a new perspective on how technology, competition, and profits intersect.
Through an analysis of its unique characteristics, evolving business role, and historical precedents, I will argue that IT's strategic importance is not growing, as many have claimed or assumed, but diminishing. As IT has become more powerful, more standardized, and more affordable, it has been transformed from a proprietary technology that companies can use to gain an edge over their rivals into an infrastructural technology that is shared by all competitors. Information technology has increasingly become, in other words, a simple factor of production—a commodity input that is necessary for competitiveness but insufficient for advantage.
The emergence of a ubiquitous, shared IT infrastructure has, as I will show, many important practical implications, both for how companies manage and invest in technology itself and, more broadly, for how they think about creating and defending competitive advantages. The way executives respond to IT's changing role will influence their companies' fortunes for years to come.
Background and Scope
This book deepens, expands, and extends a point of view that I originally presented in an article in the May 2003 edition of the Harvard Business Review. That article, entitled “IT Doesn't Matter,” has become a touchstone for a wide and often passionate debate among the suppliers and users of information technology. In dozens of articles published in newspapers, business magazines, and IT journals around the world, my thesis has been discussed and dissected, questioned and critiqued, attacked and defended. Many respected executives, business professors, and journalists have probed the strengths and weaknesses of my argument and offered their own views on IT and its meaning for business. Beyond the intellectual and practical value of the discussion, which is considerable, its very breadth and intensity underscore both the importance of this subject for companies and the profound lack of a common understanding of it.
For me personally, the debate has been at once gratifying and frustrating. It has been gratifying because I feel I have spurred a necessary, constructive, and overdue reconsideration of one of the most important business phenomena of the last half century. A relatively brief piece of business writing rarely engages so many people and brings into the open so many contending perspectives. It has been frustrating because at least a few of the criticisms of my article reflect misinterpretations of it—misinterpretations traceable in some cases to my own lack of clarity in defining the terms and scope of my argument. As I elaborate my thesis in this book, I will address many of the questions that have been raised about my views while also expressing those views with, I hope, more precision and thoroughness. I certainly don't present this volume as the last word in what I'm sure will be a long and fruitful discussion, but I do hope it helps move the debate at least a little nearer to concrete conclusions of practical benefit to managers. . . .
The Plan of the Book
I open with a brief introductory chapter, “Technological Transformations,” that provides an overview of my thesis and underscores the value of examining IT from a strategic perspective. I stress in this chapter what I see as the central—and positive—message of this book: that IT's transformation from a set of proprietary and heterogeneous systems into a shared and standardized infrastructure is a natural, necessary, and healthy process. It is only by becoming an infrastructure—a common resource—that IT can deliver its greatest economic and social benefits.
The second chapter, “Laying Tracks,” introduces and explains the critical distinction between proprietary and infrastructural technologies. I describe how the business use of past infrastructural technologies, from railroads to electric power, evolved in a predictable way that foreshadows what we've seen with IT. In particular, the pioneers of an infrastructural technology often gain lasting advantages in the early stages of its development, but as the infrastructure matures and becomes cheaper, more accessible, and better understood, competitors are able to rapidly copy any valuable new innovation.
In Chapter 3, “An Almost Perfect Commodity,” I examine the technical, economic, and competitive characteristics of IT that lend it to particularly rapid commoditization. I address in this chapter two of the most significant criticisms of my argument: first, that I overlook the almost unlimited potential for innovation in software and, second, that I ignore the continuing changes in the way IT assets are organized—in the IT “architecture,” as technologists put it. While granting that computer software is more malleable and adaptable than earlier infrastructural technologies, qualities that make it less susceptible to commoditization, I will argue that it exhibits other qualities that push it in the other direction—toward commoditization. And while acknowledging the continued evolution of the IT architecture, I will suggest that at this point most innovations will tend to enhance the reliability and efficiency of the shared infrastructure rather than enabling proprietary uses of that infrastructure.
Chapter 4, “Vanishing Advantage,” looks at the history of the use of IT by companies, showing how closely it follows the pattern established by earlier infrastructural technologies. Some critics of my thesis have argued that “IT never mattered” as a source of advantage. In this chapter I show, through case studies of several IT pioneers, that information systems and networks actually formed very durable barriers to competition in the past but that those barriers have fallen as IT has advanced. I also introduce the idea of the technology replication cycle, a concept crucial to gauging whether a strategic IT investment will ultimately pay off.
Chapter 5, “The Universal Strategy Solvent,” steps back from the close examination of IT management to describe how the emergence of a new business infrastructure can change the basis of competition in markets. I discuss the corrosive effects of the IT infrastructure on some traditional forms of competitive advantage and describe how business success increasingly hinges on the simultaneous pursuit of both sustainable and leverageable advantages. I also explain how companies should take care in balancing the need to share information and processes with partners with the need to maintain their organizational integrity. The IT infrastructure makes specialization and outsourcing easier, but that doesn't mean companies should rush to pursue them.
In Chapter 6, “Managing the Money Pit,” I turn to the practical managerial implications of the commoditization of IT. Stressing the importance of controlling cost and risk, I offer four guidelines for IT investment and management: spend less; follow, don't lead; innovate when risks are low; and focus more on vulnerabilities than opportunities. I also provide a number of examples of recent company practices that provide models for action. My intent here is not to provide an IT textbook—others are better qualified than I for that job—but rather to offer a new managerial perspective that will help both business and technology managers make appropriate decisions in the years ahead.
The final chapter, “A Dream of Wonderful Machines,” explores the broader consequences of information technology for economies and societies. I describe how our natural enthusiasm for a new technology, with its promise of renewal, can lead us to exaggerate its benefits and overlook its costs, and I examine how this bias has influenced our perceptions of the so-called computer revolution.
Such a discussion is particularly timely today. We are arriving at a turning point in the history of IT in business, with the convergence of three important trends that will shape the future. First, companies are reevaluating their approaches to IT investment and management as the economy emerges from the post-Internet-bubble downturn. Second, the technology industry is in the midst of a restructuring, as vendors reshape their competitive strategies in response to shifts in the marketplace. Third, policy makers and economists are assessing the broad impact of computers on industrial performance and productivity, which will lead to crucial government decisions about the development of the IT infrastructure throughout the world. Making the right choices in all these areas requires an open exchange of information and views, and it is in that spirit that I offer this book.